Auditors in Enron Corporation

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Introduction

Enron Corporation was one of the biggest American Energy Company. For many years company was named as America’s Most Innovative Company. Company formed in 1985 when Houston Natural Gas Company merged with InterNorth. At the beginning, the company focused on the natural gas industry market. Later, it extended the scope of its operations by investing in oil exploration and trading. It also included chemicals, coal mining, and fuel-trading operations. Its vision was to become the biggest company in the world for these markets. Twenty years from now, Enron stands out today as one of the most dramatic failures in business history. For several years the company pursued an aggressive international and domestic expansion. This strategy included several complicated deals and contracts. By the end of the period, the company was billions of dollars in debt to third party financial institutions. The big problem was that “all of this debt was hidden away from shareholders through partnerships with other companies and in December 2001 due to intense pressure Enron was forced to file for bankruptcy, the largest corporate bankruptcy in American history” (Ellis, 1).

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The major events which become the rationale of company insolvency were fraudulent accounting and illegal loans. What is more interesting is that just prior to declaring its bankruptcy in 2001, Enron Inc., published its global strategy to become the world’s leading company. At that stage “Enron was the seventh largest company in the US and valued at $70 billion by the stock exchange” (Ellis, 1). Enron auditing firm “Andersen” which was a renowned international accounting firm not only in America but all over the world having offices in more than 80 countries at that time also found guilty of obstruction of justice and was forces by law to terminate relationship with all its clients ending the long and dominant era of Anderson in US accounting industry but after three years Supreme Court reversed its conviction against Anderson.

Case Analysis

The term crisis of confidence slowly developed and quickly picked up speed once the Enron scandals were exposed into public. The level of faith, belief, trust and assurance in the Enron’s way of financial security was lost in short America’s confidence fall crashing down along with the billions of dollars they lost in investments, retirement funds, and in jobs. I belief that in this case of deception everything starts at the top and filter down to the ladder. The scandal took place over consecutive CEO positions they all have a hand in being responsible for the eminent fraud of the company. I feel that the CEO’s are in position to be blamed for this cause of disbelieve and mistrust among the American society, because they knew about the inflated profits, but reported that financial conditions had sustained significantly, they executed a systematic and creatively planned accounting fraud with investors and many other reported companies. But after this one, there are also other notorious failures in strategy by the board and central management team of the corporation. One of the biggest failures was the failure to stop using misleading accounting practices. Another one was “the failure to ensure the independence of the company’s auditor, Arthur Andersen, and the failure to protect shareholders from unfair dealings in an outside partnership run by the company’s chief financial officer” (Ellis, 1).

And finally, the Enron accountants who incorrectly listed third party investments as notes receivable on balance sheets which later caused the company billions of invested dollars to be lost. These three were the main groups of individuals (Kenneth Lay, Jeff Skilling and Andrew Fastow) that I would say were responsible for the largest corporate bankruptcy in U.S. history.

The duties of auditors are not staying constant with all the change that is happening in the technology sector. Nowadays, auditors use accounting and financial software to arrange each transaction according to a particular format. These software programs have dramatically reduced the operational time and efforts needed from auditors. In fact, now auditors can use special hardware devices to extract data from their client devices. Auditing firms now give consulting services to their clients which includes the possible disadvantages and advantages that a company might face for certain managerial decision. They also include in their consulting services white-collar related crime avoidance and / or securities related fraud.

Accounting and financial reporting of Enron had wide involvement and participation from auditing firm Anderson. It indicates that Anderson has violated the professional responsibilities of auditing standards they are involved in restructuring of Enron’s transactions. It’s been found during investigation that Anderson shredded papers related to business, by giving orders of destruction of documents, Anderson had violated auditing standards.

Auditors are people upon investors put their belief that they will protect our interest; protecting interest of stock holders and investors is also one of the notions in auditing standards. Anderson misleads investors by publishing false financial statements.

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One important question is to assess how the audit work papers are developed. Auditors start by first “identifying the audit universe secondly performing a risk analysis and then obtaining input from management relative to risks, controls and company processes. Risk and control concerns are dealt by audit staff or external auditors” (Ellis, 3). The first units to be identifies are those reporting to the CEO or President of the firm. After that, auditing is expanded to all other operations. The primary operations to be reviewed are all financial risk related like cash expenses, cash flow, investment and inventory, debt, etc. Then come all technical related risky operations like backup procedures, business continuation, change management, resistance to change, etc.

Third are “managerial risks which deal with decision-making, delegation on firm, policies and procedures, project management, oversight and monitoring, roles and responsibilities” (Ellis, 3).

After the Enron’s scandal of fraud there are many additions in auditing standards. Before this scandal auditors were viewed as trustworthy professional people who protect the interest of investors by presenting accurate financial data or results of the firm. It is unfortunate to note that only “a few recommendations were made in order to strengthen independent audit function” (Ellis, 4). An auditor should not function as part of management or as an employee of the audit client as manifestation of fraud could arise by it. An auditor to be independent should not act as an advocate of its audit client as you will be also charged as a partner in guilt with your client. An auditor should not be a promoter of the company’s stock or other financial interests as in this way you will serve as an advertiser for your client.

I think now that things have become more official and authorized in order to do anything now you have to file documents and fill out forms and have lawyers and legal obligations as when compared with the past things were more trust based, handshake was more preferable rather than today’s binding contracts. Concept of professionalism in terms of public accounting is now more focused towards ethics. Ethics is very important in the business world. Ethics is a set of “unwritten laws and rules defined by human nature, and ethics is something people encounter as difference between right and wrong” (Ellis, 4). At the beginning of the century, in 2001, the company we are discussing here, Enron Inc., was recorded by Fortune 500 magazine as the fifth largest company in the world. It was also accounted to be the market leader in energy production, trade and distribution. Authors argue that unethical accounting practices was one of the major reasons why the company bankrupted. And the effects of this bankruptcy are felt not by his top management team, who took millions home with them, but from the down the line employees and staff.

Auditing financial statements and cash flow statements, is very time consuming and requires many efforts. It also costs the company a considerable amount of money. a recommendation would be to avoid auditing quarterly financial statements in order to cut down expenses. Nobody wants their company to end up searching for a loan just to pay its external auditing.

“A big problem is that public companies must submit quarterly financial report to SEC for review which involves limited testing procedures than in-depth and time-consuming audit procedures. A public company in its annual report must include the financial statements of the all quarters.” (Ellis, 4)

Conclusion

Auditors are considered by society to be professional and ethical in their field. It is said that the first obligation an audit firm has is towards the society. The primary reason for a high level of professional conduct is because CGAs (Certified General Accountants) need to ensure that society has confidence in the services of their profession. The success of the profession depends on our clients having the utmost confidence and respect for auditors, their reputation in the profession creates a demand for their services. This is why maintaining a good reputation is considered to be the most important ethical principle. Independence in field of auditing refers to independence in mind and independence in appearance. The auditor’s legal liability may be divided into liability to clients, liability to third parties, federal securities law and criminal liability.

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An auditor may also be sued by a client under tort law; a tort is a wrong committed which injures another person’s property, body, or reputation. Auditors have responsibilities towards public and to their professional organization as set out in the organization’s code of ethics. Failure to comply will result in condemn by the professional organization. It is important to understand that acting ethically may not be the same as acting legally, nor is acting legally means acting ethically. The reason behind this is ethical responsibility is judged by ethical standards and legal liability by legal standards of responsibility.

An auditor may also be sued by a client under tort law; a tort is a wrong committed which injures another person’s property, body, or reputation. Auditors have responsibilities towards public and to their professional organization as set out in the organization’s code of ethics. Failure to comply will result in condemn by the professional organization. It is important to understand that acting ethically may not be the same as acting legally, nor is acting legally means acting ethically. The reason behind this is ethical responsibility is judged by ethical standards and legal liability by legal standards of responsibility.

Works Cited

Ellis, John. “Life after Enron’s Death.” Fast Company Magazine. 2002. Web.

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